Economy Overview – for those travelling or moving abroad

The good news in early September was that Tenerife’s football team drew 2-2 at home to Barcelona. The less good news was that it was with Barcelona’s reserve team that Tenerife shared the second-division spoils.

Similarly, the good news for most British readers is that, since the last edition of this column, the pound has strengthened by 2%, or nearly two and a half cents, against the euro. The bad news for Tenerife natives is that their currency has weakened by -2% against sterling and by -0.5% against the US dollar over the same period.

It was not that the euro did anything wrong. News that Greece would be likely to need a third bailout did not exactly come as a surprise. And some of the economic data from Euroland were really quite respectable. For example, the three purchasing managers’ index (PMI) readings for manufacturing, services, and the commercial economy as a whole were all positive for the first time in years. A positive PMI means that, on balance, the firms responding to the survey are experiencing an upturn in business. There was an equally upbeat tone to the surveys of institutional investment manager sentiment.

But the euro had nothing to crow about and the pound had plenty. The UK PMIs were considerably stronger than those from the eurozone, a couple of them touching their highest levels in more than six years. Gross domestic product – the nation’s total output – expanded by a revised 0.7% in the second quarter; a better figure than expected and more than double the Euroland performance. Unemployment ticked down from 7.8% to 7.7% and the number of jobseekers continued to fall. The only real fly in the ointment was the data for manufacturing and industrial production. Although both were flat or up on the month, both were also lower on the year.

The ongoing improvement in the UK economic data reinforced investors’ belief that it is only a matter of time before sterling interest rates begin to head higher. Although the governor of the Bank of England has done his best to temper that expectation, the market is not as convinced as he is that it will take years for unemployment to fall below 7%. They are also distrustful of the Bank’s forecast that inflation will soon slow to 2%. The result has been to make the pound almost the best performer among the world’s dozen most actively-traded currencies over the last month, second only to the New Zealand dollar. Over the last six months the pound is indeed in the top slot, having strengthened by an average of 7.4% against a basket of currencies and by 1.7% against the euro.

Whilst current sentiment is undoubtedly in favour of the pound, there must be doubts about the extent to which it can extend its rally. For it to carry on higher the UK ecostats would have to continue to deliver surprises to the upside. History suggests that is unlikely. Buyers of the euro against the pound might well conclude that now, with the pound at its strongest level since early January, is a good time to get some euros on board, whether for a capital investment or as part of a regular payment plan.

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DINKS (Dual Income No Kids) Finance is a blog discussing personal finance for couples. While by no means financial experts, we own a variety of assets including real estate and stocks. We've been up to our eyeballs in debt and have made tons of financial mistakes. However, we've successfully retired that debt and we both do learn from our failings. We hope that our voice in this blog can help others in achieving their goals!

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